4 Ways To Use Your Tax Refund To Buy a Car

The tax refund can seem like a small windfall or a reward for all the hard work you’ve done in the previous year. While it may be thrilling to receive a tax refund, you can extend that thrill by using your refund to make an exciting purchase. A tax refund car purchase is not only one of these exciting purchases that you can make good use of every day, but it can also be a wise purchase if your existing vehicle is no longer reliable or unsuitable to your needs, or if your family is adding a new driver.

When that refund check arrives, be prepared to add a new vehicle to your life with these four options.

Option 1: Buy Some New Wheels

One way to use your tax refund to buy a new car is fairly obvious: simply buy a new car. Of course, the size of your refund will dictate a few key decisions, mostly with regard to your budget. Will your refund enable you to swing the purchase price of a brand-new car, or is the cost of a used car more in line with how much money you have received?

Before You Buy

Once you’ve decided whether to purchase new or used, be sure to browse the dealer’s inventory online before arriving at the dealership. Doing this simple homework task helps you better understand what you can realistically purchase and what financing options work best for you. You will be better prepared to express your preferences to the salesperson at the dealership, thus making the car-buying experience smoother and more efficient for you.

Get Ahead on Financing

If financing your purchase is your best option, your refund can be used as a significant down payment, which will reduce your monthly payments accordingly. Lower monthly payments on a new or new-to-you car are always more budget-friendly, regardless of your budget. If you know you can already afford a higher payment per month, that sizeable down payment can earn you those fancy upgrades, technological and safety advancements, or option packages you desire.

Either way, after your tax refund has been applied as your down payment, your monthly payment should not exceed 10% of your net paycheck, or the amount of money you bring home each month. Carefully research all the costs associated with insuring and maintaining your target vehicle too: Your annual automotive costs should be less than 20% of what you make each year. Many price stickers at the dealership offer insight on some of these costs, such as how much you can expect to spend on fuel per year.

If your credit score is poor or unestablished, a more substantial down payment is viewed more favorably by lenders in that it proves you are interested in doing your best to achieve the best lending situation for your vehicle. When lenders view you more favorably, you may find them open to offering a greater span of financing options than you previously thought possible, such as more competitive interest rates.

Option 2: Choose to Lease Instead

Perhaps you’re interested in leasing a new car or SUV. Leasing can free you of loan-related interest charges or the possibility of becoming “upside down” on a car loan. Another attractive feature of a loan is that you can trade your vehicle for a newer model after a set period, such as 36 months. While it is possible to use your tax refund on a larger upfront payment on a lease, you’ll find your tax refund is better used by making the recommended down payment for your lease. Save the remainder of your refund for another purchase or set it aside to use as the down payment on your next lease once your current lease term expires.

Option 3: Pay Off a Loan

The third option for how to spend your tax refund on a new car may not be making a new purchase at all, but it can nevertheless be equally rewarding. Why not use that refund to pay off your existing car loan, thus enabling you to “buy” your car from your lender? Whether your refund is substantial enough to completely pay off your loan or just enough to get you ahead a few months, the interest you save will reap financial benefits long after this year’s tax refund is spent.

If your interest rate is higher than you’d like and you are able to obtain a better rate elsewhere, consider using your tax refund to make a significant payment toward your principal owed. You and your loan can then seek greener pastures — that is, a lender offering a better interest rate. Even if you cannot fully eliminate your loan right now, you will be that much closer to holding the title on your very own car.

Option 4: Buy New … Piece by Piece

If your tax refund isn’t new car-sized or if you’re satisfied with the car you currently drive, perhaps you can still buy something new. That “something new” in this case is something for your car, be it something your car desperately needs or an accessory you have been eyeing for a while.

Expensive Maintenance

If you’ve been putting off necessary maintenance or large-ticket items such as tires, an engine, or a transmission, your tax refund might present you with the opportunity to check these automotive-related tasks off your to-do list. Spending your refund on these items can help prolong the life of your vehicle and make it more reliable overall. If you are riding around with a crumpled fender or a few dents and dings, have your refund sponsor your car’s visit to the local body shop.

Major Splurges

You may even choose to splurge on an upgrade to your current ride, such as a paint job, new wheels, or new technology like a rear camera or a Bluetooth-compatible stereo. Even a full-service detail is a great way to use your refund wisely and restore your car to like-new condition.

Be it a used car or new car, if you are looking to buy a car with a tax refund, #1 Cochran’ vast inventory means you will find the right vehicle for your budget. Our financing and leasing specialists will ensure that you maximize your tax refund dollars with every lease or purchase. View our inventory online to find your next vehicle today.